Finance Minister Nirmala Sitharaman said during a public speech on October 18, 2020 that the government will now have to dispense with the “Socialist baggage”. She did not elaborate on what she meant by socialist baggage.

As expected this statement was misunderstood. An analyst has written in an eminent daily referring to giving employment through MGNREGS, giving free ration of food grains as socialist measures that cannot be removed.

Actually socialist baggage does not refer to the actual welfare measures and she did not mean to abolish them. Socialist baggage refers to those measures which makes the present system cumbersome and unworkable. This can be illustrated by two examples.

One is the theory of unjust enrichment which makes giving refund inadmissible till the claimant proves that he is not getting undue enrichment. This was introduced during the time when the communists were having the post of Chairman of the Public Accounts Committee. This is called the welfare law introduced in 1991 by amending Section 11 and Section 27 of Customs Act (and also excise Act correspondingly). And the practice since 1878 was given a go by.

The fine-print

It works like this. If a manufacturer or importer pays, say, 40 per cent but holds that the rate should be 25 per cent, then he files a refund claim. In the meantime he may add the higher cost of duty to the cost and realise the amount from the customer, but he may not depending on the market condition. The welfare law says that unless he proves that he has not passed on the higher burden of tax to the consumer, he will not get the refund.

This so-called law has created havoc in reality in the tax administration. The door for refund has been practically blocked forever. The Department just does not like to give refund in the name of the so-called unjust enrichment.

Though the law has been held as Constitutional in the Mafatlal judgment by the Supreme Court, the dissenting judge, Justice Suhas Sen, has quite rightly called the “doctrine of passing on the burden” quite absurd. The law of barring unjust enrichment may be Constitutional but it is not economically sound.

The Parthasarathy Shome Committee in May 2001 recommended that “the provision to deny refunds to the manufacturer by the tax administration should be removed, and the law appropriately amended”. The Kelkar Committee Report, 2002 recommended substantial modification to this law. But nothing has been done so far.

Another example is the system of forcing the manufacturers to pass on the price reduction benefit to the consumers. Section 171 of the Central Goods and Services Tax Act 2017, which deals with profiteering measures, requires that companies have to give consumers “commensurate” reduction in prices following the rate cuts in GST or input tax credit (ITC) benefits. Rule 126 of the CGST Rules merely says the authority may determine the methodology and procedure in this regard. No methodology of how to determine commensurate or profiteering has been prescribed.

Distinguishing between normal profit and profiteering can be problematic or even futile. Price fixation is a complex decision depending on supply and demand. Inherent profit motive of capitalists is undermined by such a law. Profit is the engine of growth. Nearly 40 petitions have been filed before the Delhi High Court. Whichever side loses will go to the Supreme Court.

A case about Dettol has been decided by the same High Court after a lengthy litigation though the amount is only about ₹83 lakh. It has now become a highly litigated issue since the manufacturers have challenged the Constitutionality also on the touchstone of Articles 14 and 19.

The provision was originally for two years but has been extended for another two years. The provision is to last till November end 2021 and it should be allowed to lapse. This issue is leading to too much litigation and hindering the smooth functioning of GST.

Price fixing should be left to the market forces. By making price control laws, litigation will increase and clog the system, act as deterrent to the much adored principle of “ease of doing business”. These two issues are the true socialist baggage.

The writer is former member, CBEC

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